Produced by: Abduvali Mukhamedov The New Trade Theory

Began to be recognized in the 1970s. Deals with the returns on specialization where substantial economies of scale are present. Specialization increases output, ability to enhance economies of scale increase. In addition to economies of scale, learning effects also exist. Learning effects are cost savings that come from “learning by doing” McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Application of the New Trade Theory Typically, requires industries with high, fixed costs. World demand will support few competitors. Competitors may emerge because “they got there first”. First-mover advantage. Some argue that it generates government intervention and strategic trade policy McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Porter’s Diamond The Competitive Advantage of Nations. Looked at 100 industries in 10 nations. Thought existing theories didn’t go far enough McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Determinants of National Competitive Advantage Factor endowments: nation’s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry. Demand conditions: the nature of home demand for the industry’s product or service. Related and supporting industries: the presence or absence in a nation of supplier industries or related industries that are nationally competitive. Firm strategy, structure and rivalry: the conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Porter’s Diamond Factor Endowments Firm Strategy, Structure and Rivalry Demand Conditions Related and Supporting Industries Figure McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Factor Endowments Basic factors: natural resources climate location demographics Advanced factors: communications skilled labor research technology 4-33 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Michael Porter identified four stages of development in the evolution of a country: 1. - Development based on factors 2. - Development based on investments 3. - Development based on innovation 4. - Development based on prosperity

Evaluating Porter’s Theory Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable 4-39 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.